Topic: Energy and Environment

Senate Now Debating the Manner in Which to Fleece You

After a disastrous result in the House of Representatives, the farm bill debate has moved on to the Senate, where the main conflict is about how to provide assistance to farmers. Senator Max Baucus (D, MT), who sits on the Agriculture Committe but also holds the purse strings as Chairman of the Senate Finance Committee, favors a permanent weather-related disaster relief fund alongside more “traditional” farm subsidies. The Chairman of the Senate Agriculture Committee, Tom Harkin (D, IA) prefers government subsidies based on farm revenue rather than commodity prices, and more spending on “renewable fuels” and conservation of farmlands.

Sen. Harkin wants about $10 billion dollars over the amount currently slated for farm programs to pay for his pet projects, but Sen. Baucus has made it clear that if Sen. Harkin wants more money, then he has to dance somewhat to Mr. Baucus’ tune. Sen. Harkin has in recent days appeared more open to a “modest” permanent disaster-assistance program if it means he gets his money (see here). Something tells me that Sen. Harkin’s definition of “modest” might be different to mine. Nor am I convinced that a permanent disaster relief trust fund would prevent Congress from approving extra disaster funds along the way.

The administration has issued a veto threat, but on ominous grounds. For example, the administration does not like the tax package that the House approved to pay for extra money for food stamps and sees the House income cap of $1 million dollars annual adjusted gross income as an insufficiently tight means test. As well they might, because it would affect only 7,000 farmers.

The veto threat is ominous because (a) it is based on things that are minimal and easily fixed relative to the entire package itself and (b) President Bush passed the similar 2002 farm bill without too much wailing and gnashing of teeth. At no point has the administration seriously questioned the rationale for these programs. While the President may have little to lose this time by vetoing the thing, Secretary of Agriculture Mike Johanns is reportedly seeking the Senate seat vacated by Sen. Chuck Hagel in Nebraska in 2008. Secretary Johanns has pushed strongly for reforms of farm programs until now, but presumably he would not want to campaign after being behind a farm bill veto.

Here’s an idea: instead of spreading the love around to more farmers (like the $1.6 billion in extra spending for fruit and vegetable growers who have traditionally missed out on largess), tinkering with the income limit and changing the method by which we give money to farmers, how about we scrap the whole thing altogether? See here and here for starters.

The Economist vs. Cato on Gasoline Taxes

With the Pigou Club now having gone silent in the debate over the federal gasoline tax launched by our study of the same last month, the only party left standing to hold the flag for the federal gasoline tax is … The Economist. I hope the former reemerges for a more sustained conversation sometime down the road, but until they do, let’s consider the latest riposte from our favorite news weekly.

The Economist seems to agree that a federal gasoline tax is a very clumsy and inefficient way to deal with the negative externalities associated with driving. So far, so good. But then they claim:

The discussion over taxation of carbon emissions from tailpipes … comes down to arguments over cost efficiency (a gas tax may well be preferable if the cost of assessing emissions for tax purposes is too high).

Maybe I’m not reading this right, but is The Economist seriously entertaining the argument that it might be more efficient to tax carbon emissions via a gasoline tax than via a cross-sector carbon tax? Econometric investigations suggest that it’s twice as costly to reduce carbon emissions via taxes confined to the transportation and electricity sectors than via taxes imposed across the economy as a whole.

Perhaps The Economist meant to say that “The discussion of taxation of conventional pollutants from tailpipes comes down to argument over cost efficiency.” If so, that’s different … and fine. If the costs associated with monitoring and collecting information regarding tailpipe emissions were high, there would be room for an argument for gasoline taxes as a “second-best” remedy (a point we explicitly concede in our paper).

Even so, repairing to a gasoline tax as a second-best means of addressing environmental externalities still does not suggest the need for federal taxation. State or local taxation would be far better for reasons discussed in our paper.

The Economist then moves on to take issue with our most unconventional argument – that even perfect internalization of the negative externalities associated with driving via some set of Pigouvian taxes would make the economy less efficient because it would induce greater use of mass transit. Additional mass transit use is less efficient at the margin because the literature suggests that the discrepancy between costs and charges to users associated with mass transit use are even greater than those associated with automobile use.

The Economist makes four arguments. Argument #1:

The first and most obvious point is that a carbon tax and congestion pricing will quite obviously have the same effect on transit use, other things equal, as an increased gasoline tax … If a reduction in transit use is Mr Taylor’s guiding principle, then I fear his prescriptions are misguided.

A reduction in transit use is not my guiding principle. Nor do I prescribe carbon taxes or other emission taxes. We are instead making an If/then argument. IF one wants to internalize the negative externalities associated with driving (pollution, congestion, carbon dioxide emissions, whatever), THEN one should tax those externalities directly rather than indirectly via a tax on fuel consumption.

Sure, we could have stopped there, but many economists embrace Pigouvian taxes because they think they would improve economic efficiency. But according to Cliff Winston’s work, if all transportation options were priced optimally, there would be more automobile use and less mass transit use. Thus perfect Pigouvian taxes on automobile use but no reforms in mass transit pricing (i.e. reforms that would make users pay more of the costs) would have the paradoxical effect of making the economy less, not more, efficient.

So we are giving serious economists – including those of the Pigouvian variety – two very good reasons to oppose a federal gasoline tax. Either one will suffice.

On to argument #2:

Those cited authors [and by this, The Economist is referring to Mark Delucchi and Clifford Winston, whose work we highlight in our study] do make a very compelling case that transit is inefficient relative to automobile use, so long as you take as given the billions of dollars in annual government highway spending and eliminate that spending from your calculations. And that is exactly what the cited authors have done. The Washington Post reported this week that annual federal spending on highways is now over $40 billion, which is, of course, in addition to the billions spent by state and local governments on the construction, maintenance, and policing of roads. Include those figures in the analysis, and the inefficiency argument loses all coherence.

How so? Winston and Delucchi ask the following question; if everything were priced optimally, what would would the cost of driving be? What would the cost of mass transit be? And given those costs, how much of each would people use given the benefits they receive? Both authors conclude that, in a perfectly priced world, there would be less mass transit use than at present and more driving. Hence, if we want to “get the prices right” – the explicit goal of Pigouvian taxation – the result would be more driving.

Now, how does the fact that government has spent billions of dollars on roads affect this exercise? The Economist implies that this was some kind of gift to automobile drivers that Winston & Delucchi are happy to give them without cost. But that’s not true. Until 1975, road construction and maintenance was funded entirely by motorists via the gasoline tax (see Jose Gomez-Ibanez’s 1985 essay in a book reviewed here). During the high inflation period of the late 1970s and early 1980s, however, fees and taxes did not keep up with highway expenses. But over the entire 1975-1993 period, the federal gasoline tax increased from 4 to 18.4 cents per gallon (3.6 fold increase) while the GDP deflator increased only 1.3 fold.

The federal gasoline tax has not been increased since 1993, however, and according to our colleague Randal O’Toole, 2003 data suggest that motorists only paid approximately 89% of the total capital and maintenance costs of the highway system during that year.

So there are subsidies to motorists now, but they are tiny on a per-passenger-mile or vehicle-miles-traveled basis. And during the formative years of the highway system, motorists paid more than its costs. Hence, correcting the current imbalance between fuel tax revenue and road construction and maintenance - as Winston and Delucchi do - is sufficient.

Now, argument #3:

That omission is the most egregious, but it certainly isn’t the only one. The sources take the structure of the landscape to be exogenous, when in fact highway spending in outer suburbs reduces the cost of commuting from great distances, encouraging outward migration of urban populations. That, of course, then overwhelms existing infrastructure and generates new highway construction still farther out, continuing the outward spread of the city’s borders.

We have no complaint with the observation that long distance commuters are not paying the marginal costs associated with their commutes - and neither does Winston or Delucchi. We support getting those prices right via congestion pricing and user fees. and those costs are built into Winston and Delucchi’s calculations. But if we’re going to price road use efficiently, we should also price rail use efficiently. And doing so, as we said, would lead to more, not less, driving.

Finally, we arrive at argument #4:

In calculating the positive externalities generated by rail, Brookings Scholar Clifford Winston only considers the effect rail has on reducing highway congestion. But that’s far from the only positive externality produced by rail transit. Rail facilitates density in a way that highways cannot, producing and supporting the dense urban networks present in central cities. There is a long and rich literature on the positive externalities produced by such urban agglomerations; it has been suggested, for instance, that a doubling of urban population density leads to a 6% increase in productivity. Certainly that should be included in any consideration of the relative merits of mass transit.

If there are positive externalities generated by rail use beyond the effect of rail use on road congestion, let’s see some citations! We are unaware of any in the peer-reviewed urban economics literature. And remember, subsidized rail also contributes to urban sprawl because it allows people to work in the urban center and travel further out faster at peak rather than living closer to work.

There may be a case for the elimination of the gasoline tax, provided it is replaced with levies on the negative externalities produced by road transport. That case does not include a shift away from mass transit. If the Cato authors wish to make the point that transit use is bad on efficiency grounds, they need to work much harder.

You can lead a horse to water, but you cannot make him drink.

Cato “Neutered” on Electricity Deregulation?

Last week, Peter Van Doren and I had an op-ed in The Wall Street Journal that reflected on the record of electric utility restructuring in light of the recent rate hikes experienced in the “deregulated” states. Libertarian energy consultant Mike Giberson over at The Knowledge Problem, however, was unimpressed.

Giberson offers only two substantive criticisms. First, he takes issue with our claim that the case for vertical integration was scarcely heard during the debate over restructuring:

It isn’t clear from the article where Taylor and Van Doren were during the debates over unbundling, but delving into the voluminous public records of both federal and state regulators of the electric power industry would reveal that vertical integration has been among the matters discussed at length. Earlier in the article they quote MIT economist Paul Joskow, but if they were at all familiar with his work they would not make such “unfortunate” claims.

Vertical integration was in fact a big part of the policy conversation in the state legislatures and regulatory hearing rooms during the course of restructuring. But as Economist Robert Michaels at U. Cal., Fullerton argues, those discussions were superficial, uninformed, and politically charged conversations primarily concerning utility market power and the need to corral it. Paul Joskow’s work on this matter (which we are indeed well acquainted with) along with that of other academics who’ve investigated vertical integration in the electricity sector from an I/O perspective was given little serious attention by policymakers. That was our point.

Second, Giberson seems to take issue with our contention that vertical integration is an efficient means of remedying hold-up problems between generators and power distributors, facilitating efficient investment in transmission, and maintaining system reliability. Giberson finds it “curious that Cato Institute writers are so skeptical about the ability of decentralized arrangements (like prices and contracts) to lead to efficient results.”

Market arrangements indeed have their place, but if they were always preferable to alternative arrangements, then the firm as we know it would not exist – a point well made by Ronald Coase (no enemy of markets he) in his classic essay “The Nature of the Firm” back in 1937. Just because one has great faith in the power of markets does not necessarily mean that one should enter a daily spot market in the search for secretarial help or, alternatively, daily spot markets for electric power. For a longer discussion on why “decentralized arrangements (like prices and contracts)” are problematic in the electricity business, see this Cato study from the aforementioned Robert Michaels.

With the substance now put aside, let’s examine the kicker:

And it dawns on me that through it all, the Cato authors don’t advocate anything at all, not even the “true deregulation” that they describe in the final paragraph. They discuss history, explain some economics, call the loss of vertical integration unfortunate, speculate on preferences for contracts, and suggest that a totally unregulated world might turn out to be like the old regulated world.

We are to some extent guilty as charged. We did indeed spend a lot of our available word count explaining how electricity markets work. But it seemed to us that this was necessary in order to fully explain why the current emphasis on recent price increases in deregulated electricity regimes is misleading. Consumers seem advantaged by regulation during fuel-price upswings and disadvantaged by regulation during fuel-price declines. But over a longer time frame (1990-2006), the average price increases in regulated and deregulated regimes are not statistically different. Thus the differences between the old and new regimes are more apparent than real.

We go on to argue (as we did more robustly in this study published a few years ago) that a totally deregulated world of independent generators, transmitters, and distributors and consumers buying spot would not be efficient or stable because of the hold-up problem. We speculate that the arrangements to which firms and consumers would agree would resemble vertical integration which returns certainty for firms and price limits for consumers. Giberson might not like that argument, but it’s hard to miss.

Often Cato is bold, or insightful, or both, and sometimes it is over-dramatic in asserting the costs of this-or-that government program or the benefits of some tax cut or another, but almost always Cato offers clear advocacy for liberty. Taylor and Van Doren don’t give us that Cato in their rambling Wall Street Journal essay. Instead we get what amounts to an implicit defense of the old status quo.

While we do criticize the regimes produced by “restructuring,” we do not defend the old regime. In fact we do not defend any particular substantive market outcome at all. Instead, we defend an idea – that business owners – not politicians – should decide how market enterprises are organized and operated. If there is a more libertarian argument, then I have not heard it.

Abolish the Federal Gasoline Tax!

Earlier this month, Peter Van Doren and I published a study calling for the total elimination of the federal gasoline tax. Well, the first wave of commentary is in and, thus far, we are greatly underwhelmed. Gas tax proponents are going to have to do a lot better than this to hold the intellectual fort.

Over at the Economist, we are accused of misrepresenting citations when we argue that a doubling of the gasoline tax would only reduce tailpipe pollution by about 6 percent over the long run; an accusation also levied by some commenters at Marginal Revolution. The Economist writes:

Consultation of the cited source seems to show not that an increase in efficiency leads to a 20 percent jump in vehicle miles traveled, but that roughly 20 percent of total energy savings from efficiency gains are lost to increased travel. That’s quite a different point, implying that efficiency gains could have a significant impact on emissions.

We happily accept the clarification. The Economist has crisply stated what we in fact meant to say. But clarifying the point does not undercut our argument.

The “rebound effect” discussed above is one reason why aggregate tailpipe emissions will not be reduced as much as gas tax proponent think. But the other – and more important – reason can be found in J. Daniel Khazzoom’s userID=d8b90bfe [at] cato [dot] org/01cce4405b00501c7188b&dpi=3&config=jstor">paper which we cited. To wit, current law regulates tailpipe emissions per mile traveled, not per gallon of fuel consumed. A gasoline tax will induce a consumer shift towards more fuel efficient vehicles, and that shift will lead to only modest reductions in vehicle miles traveled. The upshot is found on page 438 of Khazzoom’s paper: Just as we said, a doubling of the gasoline tax would only reduce tailpipe pollution by about 6 percent over the long run.

Now, a careful critic might point out that this problem could be remedied by regulating tailpipe emissions per unit of fuel consumed rather than by vehicles miles traveled. But we haven’t run into that careful critic as of yet. We do anticipate and acknowledge the point, however, in endnote 32 of our paper.

Another large batch of commenters score us for not conceding that gasoline taxes are an efficient means of addressing greenhouse gas emissions from cars. But it never occurred to us to state the obvious – that if society wants to reduce greenhouse gas emissions, the most efficient means of doing this isn’t with a gasoline tax. It’s with a carbon tax.

Greg Mankiw asks us: “If Congress were considering repeal of the gasoline tax together with an income tax increase to make up the lost revenue, would you favor this revenue-neutral change in the tax mix?” Answer – no. The best way to make up for the revenue loss associated with repeal of the federal gasoline tax would be to eliminate the federal spending associated with the tax. Transportation infrastructure should be a state or local undertaking – not a federal undertaking.

Lurking behind that question, however, is the belief that raising revenue via a gasoline tax imposes less efficiency losses on the economy than raising revenue via an income tax. We don’t think much of that argument, but we discuss it at length in our paper so we won’t go through it again here. Perhaps when Prof. Mankiw gets around to reading our paper, he’ll have something further to say on that score.

There is little else of substance for us to deal with after Round 1.

For instance, many commenters have argued that our paper does not properly take into consideration the underlying literature, which supposedly cuts strongly against our arguments. That literature, we are told, was most recently surveyed by Ian Parry et al. in the June issue of the Journal of Economic Literature.

But this simply tells us that most of the opinions being expressed on these blogs are uninformed by any actual reading. Even a casual look at our paper demonstrates that we review and discuss the same literature discussed in Parry et al and, in fact, we cite Parry’s work extensively throughout. Moreover, Parry et al.’s paper in the JEL makes the same point we make in our study – that a gasoline tax is a deeply problematic means of addressing the externalities associated with driving and that there are far better policy tools available to get the job done. Parry et al. suggest that federal gasoline taxes might be a reasonable “second-best” policy, but we anticipate and counter those arguments in our study, so I won’t go into them here.

Remarkably, no one has yet taken up the most radical challenge offered to the common wisdom in our paper: that even a perfectly efficient gasoline tax would do more harm than good because it would induce more mass transit use, and mass transit use imposes even more costs on society than passenger vehicle use. For this argument, we rely on work done by Mark Delucchi at the Institute for Transportation Studies at the University of California and Cliff Winston at Brookings. Is anyone up to the task?

More Tax-Funded Media Bias

This morning on Marketplace Radio, there was a clear example of the bias toward government intervention that pervades so much of the establishment media. The story was titled

U.S. finishes last in fuel economy

Online, the introduction reads, “A new report reveals that the U.S. is at the bottom of the barrel when it comes to fuel economy standards. Turns out even China tops us. ” The reporter introduces the topic of a new study on mandatory fuel economy rules in different countries and turns to the study’s author:

Drew Kodjak: At the bottom of the heap is, unfortunately, the United States.

Study co-author Drew Kodjak says Europe and Japan already have high mile per gallon rules, and they’re gonna get even better.

Kodjak: Out to 2012, Europe is projected to have a 49 MPG passenger fleet. And Japan a 47 in 2015.

Even China’s better than the American 27.5 miles a gallon.

Kodjak: So certainly a very big difference between the leaders and the laggers.

Notice the drumbeat: the United States is “last,” “at the bottom of the barrel,” “at the bottom of the heap,” a “lagger.” Stricter regulation is “better.” And all because our regulations are slightly less intrusive and burdensome than those in other countries.  I think we’re better off letting the market determine how much fuel efficiency American consumers want. But my point here is not to argue the issue, but simply to notice that Marketplace Radio, heard on tax-funded radio stations, didn’t argue the issue either. It just indicated to listeners that stricter regulation was “better,” and the United States was a “lagger … at the bottom of the heap” for having less stringent regulations.The last time I wrote about a similar one-sided, adjective-laden story on Marketplace, I referred to it as “unconscious liberal bias.” But really, how long can I keep seeing only unconscious bias? I noted in my previous item:

So where’s the bias? Let us count the ways. First, of all the studies in the world, only a few get this kind of extended publicity. It helps if they confirm the worldview of the producers. For instance, I don’t believe Marketplace covered this Swedish study (pdf) showing that the United States is wealthier than European countries (perhaps most provocatively, that Sweden is poorer than Alabama — perhaps because Europe has the kinds of laws the Heymann study advocates). Second, Heymann was allowed to appear without a critic. Third, the interviewer never asked a critical question. He never noted that the countries that Heymann was praising are poorer than the United States and in particular that many are suffering from high unemployment brought on by such expensive labor mandates. Fourth, look at the language of the questions: “lags behind,” “falling short,” “picking up the slack.”

The unstated, perhaps unconscious, premise is that countries should have mandatory paid leave and other such programs. If we don’t, we’re “falling short” and someone must “pick up the slack.” Language like that, which is very common in the media, posits government activism as the natural condition and then positions any lack of a government program as a failure or a problem.

Do Marketplace’s reporters, editors, and producers–and the reporters, editors, and producers at other media outlets–really not recognize that this sort of language biases their coverage?

Zimbabwean Economics Spreads to Capitol Hill

In Zimbabwe, the government is ordering businesses to cut prices and threatening to jail executives who don’t comply, in an attempt to deal with inflation that is now variously estimated at somewhere between 4,000 and 20,000 percent a year.

Meanwhile, on Capitol Hill both houses of Congress have passed legislation establishing stiff penalties for those found guilty of gasoline price gouging. The bill directs the Federal Trade Commission and Justice Department to go after oil companies, traders, or retail operators if they take “unfair advantage” or charge “unconscionably excessive” prices for gasoline and other fuels in an “energy emergency.” (The complex energy legislation is still working its way through both houses, though both have endorsed the price-gouging provisions.)

How’d’ja like to be the bureaucrat charged with enforcing such vague and emotional language, or the businessperson trying not to incur a 10-year jail sentence for doing something “unfair” or “unconscionably excessive”? It’d be sort of like living in, you know, Zimbabwe.

Did Congress offer bureaucrats and businesses any more specific guidance? You bet they did. H.R. 6 and S. 1263 define an ”unconscionably excessive price” as a price that

(A)(i) represents a gross disparity between the price at which it was offered for sale in the usual course of the supplier’s business immediately prior to the President’s declaration of an energy emergency;

(ii) grossly exceeds the price at which the same or similar crude oil, gasoline, or petroleum distillate was readily obtainable by other purchasers in the affected area; or

(iii) represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and

(B) is not attributable to increased wholesale or operational costs outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, or petroleum distillates.

So that seems reasonable clear: it’s a price that is “gross” or “unfair” or (redundantly enough) “unconscionable.” And it can only happen during a “Federal energy emergency”:

(a) IN GENERAL- If the President finds that the health, safety, welfare, or economic well-being of the citizens of the United States is at risk because of a shortage or imminent shortage of adequate supplies of crude oil, gasoline, or petroleum distillates due to a disruption in the national distribution system for crude oil, gasoline, or petroleum distillates (including such a shortage related to a major disaster (as defined in section 102(2) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act 42 U.S.C. 5122(2))), or significant pricing anomalies in national energy markets for crude oil, gasoline, or petroleum distillates, the President may declare that a Federal energy emergency exists.

In the United States, unlike Zimbabwe, we have the rule of law. That means vague, emotional, and nonsensical laws can only be passed upon a vote of both houses of Congress and the approval of the president.

Heritage - Out of Energy

To many people, the Cato Institute and the Heritage Foundation are closely related ideological siblings. This causes me no end of frustration. There are plenty of rather significant differences between us — health care, immigration, foreign policy, the War in Iraq, etc. — but even in areas where you would think we might agree, we often don’t. Like energy.

For instance, according to Heritage, the Ur-commandment for the federal energy policy is as follows:

Lawmakers should implement a long-term energy plan that balances supply and demand, ensures reliable and affordable supplies of energy for the future, and provides responsible stewardship of the nation’s resources.

To me, that smells of Soviet 5/10-year economic planning. If you really think a bunch of vote-maximizing politicians with no particular expertise in energy markets can competently execute those tasks, then God bless you. Me? I’d rather leave those tasks to the market, thank you very much.

Still, views over there are not monolithic. Ben Lieberman and I generally see eye-to-eye, but Ariel Cohen might as well be titled “Senior Research Fellow for Anti-Taylor Studies.” See, for instance, his worries about energy security and his support for turning Justice Department antitrust lawyers loose on OPEC.

The tension between the Lieberman and Cohen is palpable. Cohen, for instance, was generally happy with President Bush’s 2007 State of the Union address, which called for America to break its “addiction to oil.” Lieberman, on the other hand, was not. And some outside voices given a platform at Heritage muddy the waters further. For instance, Daniel Fine appears willing to entertain federal subsidies for oil shale development, and no one over there — to my knowledge — has said a discouraging word about Republican efforts to launch “Synfuels, Part Deux.”

So it was with some interest that I read a new missive out of Heritage from Stuart Butler and Kim Holmes — Heritage’s vice presidents for domestic and foreign policy studies respectively — on the 12 principles that should guide federal energy policy. When the bosses step in to lay down some guidelines in a policy arena where tension has previously existed, one should pay attention.

And what do they have to say? Not much that I would say. Let’s go through their principles one by one.

1. Avoid costly environmental regulatory man­dates that will achieve little environmental gain.

No problem here, but the idea that environmental regulations are constraining investment in America’s energy infrastructure is greatly overblown, as we’ll see when we get to their nearly-identical Principle #5.

2. Rely on the private sector’s research and development capabilities.

Fine, but Butler & Holmes support generalized rather than specific tax subsidies for energy R&D, which they imply here but make more explicit when they get to Principle #7. Given where energy prices are today, I don’t think investors need any encouragement from the taxpayer to engage in these undertakings. Profit incentives established by endogenous price signals should suffice.

3. Urge government agencies to learn from the private sector.

Yeah, that will happen. The reason government agencies rarely behave like private businesses is because their incentives are different. Public actors gain utility by maximizing political capital. Market actors gain utility by maximizing profits.

That aside, Butler & Holmes seem to be saying that the Pentagon and other federal agencies should be willing to pay more for fuel efficiency than they do at present. Maybe, but fuel efficiency costs money, and unless we know the gains associated with those expenditures versus the gains associated with alternative expenditures, we can’t confidently offer advice.

4. Make all sources of energy within U.S. bor­ders accessible.

I’m not so sure. If policymakers could allocate scarce resources among competing user groups in an efficient manner without price signals to guide them, then the Soviet Union would probably still be around. We don’t really know whether ANWR, for instance, is more valuably employed as an oil platform or as a wildnerness preserve because we have only limited information about the public’s willingness to pay for either. Now, I suspect that, it these things were left to the market, that there would be more energy development on federal lands, but I don’t know that. It would be best to privatize the lands at issue and let market actors sort this out.

Regardless, Butler & Holmes argue that “Failure to make full use of these domestic energy resources exacer­bates the security and cost problems caused by geopolitical events and makes America more vulnerable to supply disruptions and price increases.” This is nonsense. Supply disruptions anywhere in the world increase the price of crude oil everywhere in the world to more-or-less the same degree, so increasing domestic production does nothing to insulate our economy from malicious producers or random disruption events abroad.

Nor would increasing domestic production reduce revenue to producers very much given that there are not enough untapped reserves in the United States to affect world crude oil prices in any substantial manner.

Nor is increasing domestic production a hedge against the threat of embargo for the simple reason that embargoes can’t work absent a deep-sea navy to enforce them. All that happened in 1973, for instance, was instead of buying our oil from Arab members of OPEC, we bought our oil from people who bought their oil from Arab members of OPEC and shifted to non-OPEC producers, displacing their customers who then bought from Arab members of OPEC.

5. Remove artificial constraints on the domes­tic energy infrastructure, including unneces­sarily severe environmental regulations.

While it would be convenient for anti-government types like me to argue that “Red tape has restrained the expansion of refineries, construction of new pipelines and electricity transmission lines, and construction of new power plants,” that’s not entirely true. Refineries are not being built because (i) it’s cheaper to expand capacity at existing refineries, and (ii) because it’s a hotly competitive industry with little return on investment capital compared to the returns available to the industry elsewhere. Transmission lines aren’t getting built for a whole host of reasons, and “red tape” is only a relatively minor contributor to the problem.

The proposition that “Several key domestic energy sources, particularly coal and nuclear power, can fulfill their potential and thus help to achieve energy security only if costly regula­tions and procedural requirements are revised or eliminated” likewise misdiagnoses the problems. Nuclear power plants aren’t built because they are simply too expensive, and even the industry’s own trade association thinks the regulatory problems identified by Butler & Holmes are relatively nonexistent (something I learned when sitting on a panel with Richard Myers, Vice President at the Nuclear Energy Institute, at a conference sponsored by the Manhattan Institute earlier this year).

6. Ensure that any effort to reduce reliance on foreign oil is grounded in policies that are best for the economy.

I could write a book on the absurdity of the popular campaign against “foreign oil,” but rather than turn this blog post into said book, let me simply propose the following: The case for importing oil is the same as the case for importing anything else. If it’s cheaper to get oil from a foreign producer than from a domestic producer, then economic health is improved by buying from the former source rather than the latter. The case for free trade applies to oil just as much as it applies to steel, tennis shoes, or television sets. There is no “BTU exception” to Adam Smith’s observations on this matter.

Anyway, Butler & Holmes want to have the feds lead us in a campaign to diversify America’s energy supplies. Poppycock. If diversification makes sense as a hedge against supply disruption, then why won’t market actors efficiently diversify of their own accord? Until I hear a reasonable answer to that question, we can deposit this idea into the wastebasket labeled “ideas that make sense for one minute until you think about them for two.”

7. Manage risks to critical energy infrastruc­ture as a responsibility shared jointly by the government and the private sector.

Why should the taxpayer expend funds to protect private property? Don’t property owners have every incentive to optimally invest to protect assets worth millions and in some cases billions of dollars? What exact market failure leads us to think that they don’t?

Unfortunately, Butler & Holmes don’t get into that. Instead they simply assert that “Government can best understand threats and take steps to reduce them, while businesses can best assess their own vulnerabilities and address them effectively.” Question #1: what makes them think that government assesses risk better than market actors? Question #2: what makes them think that government knows better than private asset owners about how to efficiently address whatever risks are identified?

8. Establish effective risk communications for energy issues.

I’m all for educating the public about energy issues and energy risks, but I’m not convinced that vote-maximizing politicians with no expertise in energy markets are in any position to constructively engage in that activity. Nor am I convinced that Joe Public trusts government enough to take anything it says on these matters at face value. And he’s right.

9. Develop foreign policies that thwart the capacity of coercive regimes to employ energy supplies as an economic weapon.

The oil weapon is the foreign policy equivalent of UFOs — often reported to exist but never produced for public inspection. Can producers purposefully and signficantly cut way back on production and consequently harm consumers? Sure, in theory. Have they ever done so? No. Why? Because it would blow their economies to smithereens. Simply put, producers need the money derived from oil revenues more than consumers need the oil from the same.

Regardless, the ability of producers to inflict damage on consumers in this manner is entirely related to how dependent consumers are on oil … from whatever source. There is no foreign policy in the world that can change that fact.

10. Sustain access to the global marketplace.

Sure, count me in. But when Butler & Holmes go on to say that, “To accomplish this, the United States should retain the capability to use all of the instruments of national power — including military, diplomatic, law enforcement, intelligence, economic, and informational power — in any theater where U.S. interests could be at risk,” I get off the policy train. I simply do not think the U.S. should be threatening war if a country is not producing as much oil as we might like or is adopting anti-market policies that we disapprove of. In short, I say “no blood for oil.”

11. Discourage restrictive international regimes.

Sure, but how? As noted above, Heritage’s Ariel Cohen thinks we should prosecute OPEC as a criminal conspiracy in violation of U.S. antitrust law. I think that’s nuts. Short of that, how can we “discourage these practices” — as Butler & Holmes put it? Beats me.

How about a policy of providing no favors whatsoever to cartel members? That is, no military assistance, no foreign aid, and no bilateral actions that provide any benefit to those countries whatsoever? That might make some sense, but then we’d have to get out of Iraq (why are we defending a regime that’s a member of said criminal conspiracy?), tell Saudi Arabia that, as far as al Qaeda is concerned, they are on their own, and inform Kuwait that we regret having lifted a finger to defend that country against fellow-conspirator Saddam Hussein and won’t do that again were Iran, say, to come a-knocking. That would be fine with me, but I doubt that it would be fine with Butler & Holmes.

12. Recognize that not all trading partners are equal.

On the surface, what’s to argue with here? Of course Canada (our number one source of imported oil) is not the same as Venezuela (our fourth largest supplier of imported oil). But Butler & Holmes is smuggling in a more ambitious argument. To wit, America (presumably when possible) should trade with producers that share our political values and not with those who don’t.

Decisions about where America gets its oil are not, however, made by some bureaucrat in the Department of Energy. They are made by thousands of private actors in energy markets. So a policy of discouraging imports from countries a, b, and c while encouraging imports from countries x, y, and z by neccessity means regulating a vast swath of the market previously unmolested by government.

What would be gained by this? Nothing much. As noted above, America’s vulnerability to supply disruptions abroad is dictated by how much oil it uses, not where its oil comes from. Producer revenues are dictated by global supply and demand curves that establish price, not by the identity of the parties lining up for its oil. All that would result from the intervention suggested by Butler & Holmes is slightly higher domestic oil prices. That’s because buying from a distant “good actor” (say, Norway) rather than a much closer “bad actor” (say, Venezuela) means paying higher transportation prices.

Butler & Holmes conclude with this: “Americans clearly understand that freedom, opportunity, and their very quality of life suffer when abundant, affordable energy supplies are threatened.”

Americans may think that, but that doesn’t make it so.

Even with the highest inflation-adjusted gasoline prices in recorded history and plenty of threats in the air menacing supplies abroad, Americans spend less on automotive fuel as a percentage of their take-home pay than they have during most of modern history and the economy continues to hum along nicely. Even a worse-case scenario, like the loss of Saudi Arabia to the world market (13% of global supply), would likely have no more impact than the loss of Iran to the world market (10% of global supply) had in the late 1970s (which is particularly the case given that much of the damage from the 1978 price explosion was due to the oil price controls in place at that time, not a rise in oil prices per se). America survived the latter event and would certainly survive the hypothetical equivalent today without losing its “freedom, opportunity, or quality of life.”

It would be nice to have more allies on the Right. Unfortunately, I find that the Sierra Club is more willing to entertain free market energy policies than is the venerable Heritage Foundation. And that’s sad.